Sources of Financial Information to Measure Business Performance

Sources of Financial Information to
Measure Business Performance
By: Jack McAllister, Ph.D.
A dairy farm business usually has several financial objectives. Examples would usually
include to “make money”, to be able to pay bills and make debt payments when they come
due, to earn a return on the investment in the business and to increase the value of the
owners share of the business over time. Where are the sources of information which would
help you determine if these objectives are being met? A look at the farm account check book
bank balance might be the first place we would look. This would be helpful but by itself it
would not provide all the financial information necessary to make the judgment. In fact, to
effectively evaluate the financial performance of the business requires financial information
from three sources: a balance sheet, an income statement and a cash flow statement. Each
of these financial summaries gives important, information of somewhat different type, for
making that overall assessment of how the dairy farm business is doing.
Balance Sheet
The balance sheet is a summary of what the business owns (its assets) and what it
owes (its liabilities) and the difference between the two (net worth, also called owner’s equity).
Assets are categorized into two kinds, current and non-current. Current assets are those that
are cash or can readily be converted to cash within the next year. They can include cash and
checking account balances, growing crops or market livestock, and monies owed to the
business. Non-current assets include intermediate assets and long term assets. Intermediate
assets will include breeding livestock, farm machinery and equipment and titled vehicles.
Intermediate assets are those assets that could be sold, used up or might last from one to five
years. Long term assets include land and farm buildings. Intermediate and long term assets
can be valued on a cost basis or a market value basis. Cost basis valuation uses purchase
price less accumulated depreciation. Market value reflects the expected selling price of the
asset if it were sold. Liabilities are also categorized as current and non-current. Current
liabilities cover a period over the next year. They include interest on debts which is
accumulating and is due to be paid in the next year, principal payments on term debts which
will be due in the next year and taxes to be due in the next year. Intermediate liabilities cover
the same period as intermediate assets and include debt on farm machinery, breeding
livestock and equipment which is to be paid off in the next two to five years. Long term
liabilities are debts to be paid over a period of more than five years such as that on land and
buildings. Any taxes which might be due if the assets were to be sold must be included as
deferred liabilities. The total assets and total liabilities are calculated. The net worth of the
business is the difference between the total assets and the total liabilities and represents the
balance of the assets and the liabilities.
Income Statement
The income statement summarizes the income and expenses of the dairy farm
business and usually covers periods from one month to one year. Sources of income to the
dairy are usually categorized into milk sales, cull livestock sales (i.e. cull cows and bull
calves), and breeding livestock sales. If there are crop sales of crops usually used in the
dairy, such as hay, they would be included as well. Expenses fall into several categories:
Seed, Fertilizer, Chemicals, Custom hire, Purchased feed, Breeding fees, Veterinary,
Livestock supplies, Livestock and milk marketing, Interest, Fuel and oil, Repairs, Hired labor,
Real estate taxes, Farm insurance, Utilities, Dues and professional fees and Miscellaneous.
Net cash income is the difference between total farm income and total cash expenses from all
categories. Net farm income is net cash income less depreciation.
Cash Flow Statement
The cash flow statement is a log of cash inflows (cash coming in to the business as
income) and cash outflows (cash going out of the business as cash expenses). The cash of
the business coming in and leaving is generally categorized in the cash income and expense
categories used in the income statement. It tracks the cash position of the business on a
monthly basis. A positive cash flow position is one where cash inflows are greater than cash
outflows. The cash flow statement can be a history of the cash flow for the business.
Predicted cash income and outgo can also be a planning tool for the dairy farm business as
well and can be constructed from historical cash data from the business.
From these sources of information, there are many measures which can help the dairy
farm business owner determine how the business is doing.
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